SHARES in WHSmith plunged yesterday after the high street retailer became the first company to issue a profits warning after a disappointing 2003 Christmas.

SHARES in WHSmith plunged yesterday after the high street retailer became the first company to issue a profits warning after a disappointing 2003 Christmas.

Job cuts could follow at its Swindon and London head offices with WHSmith warning that annual profits would be "materially below market expectations".

Analysts immediately slashed their full-year forecasts for WHSmith by nearly 40% and expect the group to report profits of #65m for the current trading year.

This pushed the share price down 13% as investors reacted to flat like-for-like sales for the 17 weeks to December 27, with sales of CDs and DVDs particularly disappointing.

WHSmith has 550 stores across the UK and has a strong presence in the high streets of Wales.

The company announced it was replacing its head of retail in the UK with chief executive Kate Swann and has launched a detailed operational and financial review of the business.

A spokesman said redundancies among its 1,000 staff at Swindon and 200 employees in London had not been ruled out as it seeks to claw back costs.

Ms Swann said, "These are, by any standards, disappointing results reflecting tough conditions in the UK high street and the fact that we have not dealt with those conditions as well as we should."

Pressure was greatest in its entertainment division with sales 3% lower in the 17-week period on a year ago, while pressure on margins from book sales at its 677 stores has been "intense".

There was some cheer from publishing arm Hodder Headline, which recorded a sales increase of 11%, while newspaper and magazine sales rose 4%.

But WHSmith warned a backlog of surplus stock had built up and clearance would hit operating profits.

Underlying costs rose by 4% in the festive period while marketing costs increased by #3m as the group took a more promotional stance.

The operational and financial review would spark a further stock clearance and lead to a further operating charge in the current year.

Retail expert Richard Ratner, of stockbrokers Seymour Pierce, said other retailers were likely to follow WHSmith in issuing profits warnings, adding, "What has emerged can only be described as disastrous."

Investors in WHSmith should brace themselves for a cut in the full-year dividend of more than 30%, he said.

But the replacement of UK retail managing director Beverley Hudson with Ms Swann offered hope of a turnaround in business, he added.

Ms Swann took over as chief executive at the end of October from Richard Handover.